Tax Planning for Retirees

Alan Baker
San Jose IBM PC Club
November 13, 2012

Tax Planning for Retirees

A Disclaimer

Not a real doctor

These methods work for me, but they may not be right for you.  I am not a financial professional.

About Joe

Joe retired from IBM at age 64.  Two years later his income comes from Social Security, a 401K, and a small pension.  He also owns stock and mutual funds which he buys and sells occasionally, so his income tax varies from year to year.  So he decided to do some planning.

Planning Step 1: Goals


Define your big picture financial goals, for example...

Joe's goals include:

Planning Step 2:  Actions

Identify specific actions to implement those goals over at least a year.  Joe plans to...

  • Simplify investments
    • Plan item 1:  Consolidate brokerages
    • Plan item 2:  Convert 401K to a regular IRA
  • Implement an asset allocation plan
    • Joe finds that his current asset allocation is 60% equities, 30% bonds, 10% cash and that's too aggressive for him.
    • He wants to reduce equities by 20% and increase bonds by 20% to be more conservative.
    • Plan item 3:  Replace 5% of his stocks with bonds in each of the next 4 years.
  • Withdraw all IRA during his lifetime
    • Joe wants to bounce the undertaker's check.
    • He expects to live to age 88 and his IRA's RMD at age 70-1/2 is $17K.
    • Plan item 4:  Start withdrawing from IRA at $20K/yr now
  • Gifts
    • Plan item 5:  $4K/yr to charities
    • Plan item 6:  $13K/yr to daughter

Planning Step 3:  Estimates

Understand the specific financial impacts of those actions.  Joe's actions have these impacts:
  • Long-term capital gains
    • His sale of appreciated stock will trigger capital gains.
  • Ordinary income
    • His withdrawals from his IRA are ordinary income.
  • Total assets
    • His gifts will reduce his assets by 2%.
  • Cash
    • He will withdraw more from his IRA than he gives in gifts so his net cash will increase.
  • Asset allocation
    • His asset allocation will improve as planned.

Planning Step 4: Taxes

Understand the income tax impacts of those actions.   Joe's actions have these impacts:
  • Capital gain of $6K from sale of stock will increase his taxable income by $900
  • IRA distribution of $20K will increase his taxable income by $20K
  • Charitable gift of $4K will decrease his taxable income by $4K

Spreadsheet Time!

  • Joe plans to change his asset allocation.  His asset categories are listed across the top.
  • His planned financial actions are listed along with the impacts on each category.
  • His annual totals show the net changes to each category.
  • Amounts from the planning worksheet are carried forward to the tax worksheet.
  • The tax worksheet shows the effect of his actions on his taxable income.

Tax Planning for Retirees

  • The planning steps are a series of refinements.   
    • Each step clarifies the preceding step. 
    • Clarifications may require adjusting the preceding step
  • The steps:
    1. Goals:  Define your financial goals
    2. Actions:  Identify specific actions to implement those goals
    3. Estimates:  Understand the financial impacts
    4. Taxes:  Understand the tax impacts